A Federal Reserve-style survey found 'pervasive weakness' in China's economy

A private survey of 2,100 businesses in China found that there is “pervasive weakness” in the world’s second-largest economy.

According to a report from Bloomberg, the latest edition of CBB International’s latest “Beige Book” survey of economic activity in China found that the government-engineered shift from an industrial to services-based economy hasn’t been going smoothly this year.

This report is modelled off the Federal Reserve’s Beige Book report, which is a survey full of economic anecdotes collected from each of the Fed’s 12 economic regions.

CBB’s latest report on China showed indicated that earnings trends have been “particularly disturbing” as the number of firms reporting earnings gains fell to the lowest level on record.

This year, official Chinese economic data has indicated a measured slowdown in the world’s largest economy, which was expected to grow at a rate of just under 7% this year, the slowest in about 25 years.

Additionally, financial markets around the world have been spooked by a weakening of the Chinese yuan, which has been steadily devalued by the People’s Bank of China — China’s central bank — this year. Earlier this year, however, China won a major symbolic victory when the IMF added the yuan to its reserve currency basket.

CBB’s report also indicated that the labour market has been deteriorating in China in a particularly worrying trend, with CBB writing, “More concerning than overall growth weakness was degradation of two components of the economy that were previously overlooked as sources of strength: the labour market and the impact of inflation.”

Back in August we highlighted research from Nomura’s Richard Koo, who noted the worrying decline in labour market conditions in China, writing, “Now that the nation’s working-age population is starting to decline, the only way the economy can grow is via higher productivity per worker, which requires an efficient allocation of resources throughout the economy.”

But this efficient allocation is facing global pressures, with this chart from Credit Suisse showing how China’s major competitive advantage — cheap labour — has dried up over the last couple of decades.

And now, it is all coming to a head.

Read the full report at Bloomberg here »

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